>STATE BANK OF INDIA: Striving to maintain market share in retail space

 Retail lending rate cut: SBI had cut its lending rates in its retail portfolio such as Home loans (upto Rs30 lakh) by 25bp to 10.25% and Auto loans by 50bp to 10.75%. SBI’s rate cut followed the RBI’s decision to decrease the Statutory Liquidity Ratio (SLR i.e. the amount of deposits that have to be invested in government bonds and other liquid assets), by 100bp to 23%. The 100bp reduction in the SLR has freed additional Rs10,000cr for SBI, coupled with Rs6,500cr released through the reduction in export refinance, which led the bank to cut lending rates in retail.

 Striving to retain market share amidst increasing competition in retail: The Indian economy has been witnessing a slowdown with receding capex loan pipeline, and hence, majority of the banks are increasing their lending portfolio in retail segment, since the consumption story in India remains robust. For instance, the
gross bank credit for scheduled commercial banks as on June 29, 2012 has increased 3% since March 23, 2012 to ~Rs45 lakh crore, however, the retail sector grew by 4.1% to ~Rs8 lakh crore during the same period. Considering SBI’s strong distribution network with access to cheaper deposits, the bank has
one of the lowest costs of funds as compared to some other peer group banks. Hence, in anticipation of increasing competition in the retail space, due to drying term loan demand, SBI cut its retail rates to maintain the market share in home loans (~26%) and auto segment (~18%). SBI had cut lending rates by 50-350bp
(earlier in June 2012) across various categories of borrowers such as SME and agriculture segments. The bank had also reduced the tenor premium on term loans by 40-100bp. We believe that the margins should be maintained at 3.8% for FY2013 considering the CRR and SLR cut.

 Asset quality issues: GNPAs in absolute terms increased 69.8% yoy and 18.9% qoq to Rs47,156cr, whereas, NNPAs increased 63.4% yoy and 28.5% qoq to Rs20,324cr as on 1QFY2013. Gross slippages increased by 2.5x sequentially to Rs10,844cr on the back of higher stress in Mid-corporate and SME sectors. Management has guided for Rs3,000-4,000cr by way of recoveries and upgradations. Cumulatively, the restructured book stood at Rs36,904cr out of which 20% has slipped into NPA.

Outlook and Valuation
Given the monsoon deficit in the country and the prevailing stress in the overall economy, we forecast continued asset quality pressure on SBI (at least for another 2-3 quarters). The bank reported its worst asset quality numbers with unprecedented rise in slippages in 1QFY2013. At the CMP of Rs1,845, the stock is trading at 1.1x its FY2014E standalone ABV (after adjusting for its associate banks and non-banking subsidiaries). We maintain our Buy recommendation (based on SOTP methodology) on SBI with a target price of Rs2,142.

To read report in detail: SBI

>AUROBINDO PHARMA: 3QFY2012 Result Update

Performance boosts sequentially
Key highlights of the result


■ Better than expected 3QFY2012: Aurobindo reported better than expected top-line growth of 17.7% yoy (19% qoq) led by low margin ARV API (up 106% yoy) and healthy formulations growth in EU and ROW markets (up 45.1% yoy), partially aided by weak INR. The US formulations grew 14.9% qoq despite the ban on non-betalactum plant, which is commendable. The licensing income remained low at Rs22.8cr.


■ Margins improved sequentially: Despite higher contribution from the low margin ARV tender business, the gross margins improved 60bp qoq to 44.1%. Further, favorable currency led the EBITDA expansion by 400bp at 13.3% qoq as exports remain unhedged.


■ APAT up 10.2% qoq: Aurobindo reported net loss of Rs28.5cr in 3QFY2012, affected by USFDA issues and forex loss of Rs144.5cr on account of loan restatement. Adjusting for the one-time expense, the APAT stood at Rs116cr, above our estimate.


■ Concall takeaways: (1) The Company expects USFDA inspection by March, 2012 for Unit III and by June, 2012 for Unit VI, (2) It has guided for 25 product launches in US out of which 11 from Unit III and 14 through Unit VII post USFDA resolution in FY2013E, (3) AstraZeneca contract is likely to start from October, 2012 and it expects to launch ~80 products (worth US$30-50mn) by December, 2013, (4) Pfizer contributed Rs67cr in 3QFY2012, expected to double in 4QFY2012, (5) Company guided to improve margins by cost saving of US$1.5mn per quarter on Unit VI, (6) Capex guided at Rs200cr for the next 2 years, while, tax rate at 20% for FY2013, (7) Gross debt stands at Rs3,360cr, cash at Rs225cr.


Outlook and Valuation
Aurobindo’s 3QFY2012 performance reflected strong growth traction on a sequential basis. New launches in EU and ROW markets, gradual improvement in US through shift of products from affected units and favorable currency led to better than expected quarter. Despite management’s encouraging picture of strong visibility (US$2bn sales guidance by 2015) led by new launches in US, ramp up in filings in niche OCs and OTC segments, pick up in Pfizer and AstraZeneca sales and sustained growth in EU and ROW, we believe that the growth would remain under pressure until the USFDA resolution is obtained. We factor in the sequential improvement of the company and revise our EPS to Rs13.3 (Rs11.9 earlier) and Rs14.5 (Rs13.9 earlier) for FY2012E and FY2013E respectively.


The stock has corrected 51% in the last 1 year due to slippages in growth affected by import alert on manufacturing plants and high forex losses. Further, high fixed costs relating to facility up-gradation and import alert on Unit VI impacted its operating performance. CBI raids with regards to financial misdeeds by promoter also added to its woes. We believe that stock correction is overdone (up by 25% in the last 3 months) and a likely rebound in growth and margins would drive growth. Hence we maintain Hold with a price target of Rs139.


To read full report: AUROBINDO PHARMA

>2012: The World Is Not Coming To An End…

Considering the way 2011 is being looked upon by investors and non-investors alike and inferences being drawn for 2012, it seems that the prophecy made by someone that ‘the world will come to an end in 2012’ is being taken too seriously!


Well undoubtedly if we make a list of the positive and the negative events of 2011 the Well, undoubtedly, 2011, latter will certainly outperform (we are not making the same here though). However, to assume that the world will not be able to rise above the challenges, sooner than later, will be naïve. Then why be pessimistic? If humans don’t evolve in terms of solving financial problems, tackling nature’s fury, and achieving improvement in technological and capital efficiency, then who will? How will the world grow?


And with India yet to cover substantial ground to reach the coveted ‘developed economy’ status, rest assured, the 1.2bn Indian workforce is working towards this goal. Add to this the 1.3bn workforce of China and we get over 35% of the world’s ‘young’ population seriously racing to be part of the next super powers.


With the above optimism and faith in human prowess, and not trying to undermine the near-term challenges that need to be tackled, we look at a set of Q&A (definitely not exhaustive) that should help enlighten equity investors about many issues that are important from his/her investment point of view and may be at the top of his/her mind.


1. How is the global and domestic macro environment stacked up?


2. What are the headwinds that are collectively affecting consumer spending / corporate investments / economic growth / investor sentiments / stock market fortunes?

3. What is the probability of an improvement in the domestic economic scenario in 2012?


4. So, when can one expect an easing in RBIs monetary policy?


5. What global/local indicators must be watched out for in 2012 that will have a direct positive/negative impact on Indian equities?


6. At what level is the market expected to bottom out?


7. What should be the investment strategy for equity investors in 2012?


8. Which are the sectors one should look forward to in 2012?


9. Is there a possibility for an investor into Indian equities to make money in 2012?


10. Ok, so what is the conclusion for 2012? Is it the end of bad news?


To read full report: STRATEGY
RISH TRADER

>Havells India announced a 50:50 JV with China’s Shanghai Yaming Lighting Co. Ltd. to set up a lighting products plant in China

Looking East for accelerated growth


Event: Havells India announced a 50:50 JV with China’s Shanghai Yaming Lighting Co. Ltd. to set up a lighting products plant in China. The JV will start operation by April 2012 under the name Jiangsu Havells Sylvania Lighting Co (JHSL) with an initial investment of US$50mn by the two partners. Our interaction with the management of Havells India reveals that the company will invest US$25-50mn in the JV over the next 3-4 years (through internal funding) and expect to achieve a turnover of US$100mn in the said period (US$20-25mn in FY2013 itself).


Our view: We take this JV as a positive development for the company as our preliminary analysis shows that the development is expected to be marginally EPS accretive for Havells India over the next couple of years. However, we view this JV to be significantly beneficial for the company over a medium-to-long-term horizon in terms of entrenching into the Chinese market with a local partner. We expect Havells India to record a turnover of Rs125-130cr in FY2013E and scale upto Rs450-500cr until FY2015E. While, we have limited clarity on the margins front, we have assumed JHSL to operate at the same margins as Havells India (China’s demographics is similar to India and the JV is formed on the existing business strength of Havells India). Going forward, we expect EPS accretion of upto 2-3% for Havells India from this JV over the next 2-3 years based on the limited information available.


Outlook and Valuation
Havells India’s current exports to China is to the tune of US$5-6mn in revenue terms. While we believe that the JV will help Havells establish a local presence in the Chinese market, thus aiding the company further to cater to the growing demand and need in China for lighting products, we have not factored the JV into our numbers yet due to lack of clarity. We expect Havells India to clock ~13% CAGR in Net Sales over FY2011-13E to Rs7,205cr (Rs5,613cr in FY2011) and also anticipate that the company would achieve a Net Profit CAGR of ~20% during the same period. At the CMP of Rs385 the stock is trading at a P/E of 12.8x and 11x its FY2012E and FY2013E EPS respectively. We maintain our Buy recommendation on the stock with a target price of Rs455 based on 13xFY2013E EPS of Rs35, indicating a potential upside of ~18% from the current levels.



Risks to the view

•  Increase in input costs (Copper and Aluminum) and currency fluctuation could have negative impact on profitability
•  Slowdown in Europe (contributes ~70% revenue of Sylvania’s sales) will impact profitability adversely

To read the full report: HAVELLS INDIA
RISH TRADER